Microeconomics Answers

Distinguish between substitutes and complements using cross elasticity coefficients

b. If households spend $55 billion on goods and $45 billion on

services, how much in revenues do businesses receive in the

product market?

If Veronica Vaughn spends all of her daily income on cigarettes and Yoo Hoo, she can afford 10 packs of cigarettes and 10 bottles of Yoo Hoo. She can also afford 6 packs of cigarettes and 22 bottles of Yoo Hoo.

Now suppose the price of cigarettes falls by $1 and the price of YooHoo roses by $1. If Veronica was consuming 5 packs of cigarettes and 30 bottles of Yoo Hoo prior to the price changes, how much must her income rise under the new prices in order for her to just afford the old bundle, (5,30)?

A consumer's Total Utility Function of two goods X and y are as follows:

TUx=50x-5x²

TUy=32y-4y²

Price of X=Rs.5

Price of y: Rs.8

Consumer income : 120

i) Derive consumer's budget constraint

ii) Derive the marginal utility X

iii) Derive marginal utility Y

iv) Find out the consumer optimum combination of good X and Y at the market.

A city has built a new high-rise car park. There is always an available parking spot, but it costs a1 a day. Before the new high-rise car park was built, it usually took 15 minutes of cruising to find a parking space. Compare the opportunity cost of parking in the new car park with the old parking system. Which is less costly and by how much?

Suppose a firm operating in a perfectly competitive industry has costs in the short run given by:

SRTC = 8 + 1/2Q^2 and therefore MC = q.

(c) Assuming that the firm is a price-taker operating in a competitive market, derive an expression for the firm’s supply curve, (the profit maximizing output for the firm as a function of the market price, i.e., qS = f(p). Assuming the firm is one of 100 identical firms in the industry, what is the short-run supply curve for the industry, i.e., QS = f(p)? If demand is given by QD = 1000 – 100p, what are the short-run equilibrium price, market quantity, and firm quantity? Is this a long-run equilibrium? [Hint: Calculate firm profit in the equilibrium.]

(d) If the minimum point of the short-run ATC curve for all firms(existing and potential)is also the minimum point of the long-run average cost curve (LRAC), calculate the long-run equilibrium price, market quantity, and firm quantity. What is the long-run equilibrium number of firms in the industry?

Suppose a firm operating in a perfectly competitive industry has costs in the short run given by:

SRTC = 8 + 1/2Q^2 and therefore MC = q.

1. (a) Derive expressions for fixed costs (FC), those that do not vary with output, variable costs (VC), those that do vary with output, average variable cost (AVC), and average total cost (ATC).
2. (b) At what quantity is AVC at its minimum (at what AVC level)? At what quantity is ATC at its minimum (at what ATC level)? Calculate ATC at q = 2 and q = 8 and sketch MC, AVC and ATC betweenq=0andq=8.

• True, False, or Uncertain
• Explain why each of the following statements is True, False, or Uncertain according to economic principles. Use diagrams where appropriate. Unsupported answers will receive no marks. It is the explanation that is important.
• A2-1. If a Prof leaves their $100,000 per year job to start a business that earns annual revenue $400,000, and has annual labour and rental costs of $200,000, the economic profit of the business is $200,000.
• A2-2. A decrease in the wage rate will cause a firm’s marginal cost curve to shift down.
• A2-3. For an increase in output, average costs change by more in the short-run than in the long-run, but for a decrease in output, the opposite is true.
• A2-4. If the pandemic causes firms in a competitive industry to spend $100,000 per month on safety measures (regardless of the output level), the firms bear this cost in the short-run, but consumers bear it in the long-run. 

Identify and defend the type of price control that can be implemented to avoid the change in equilibrium. 

Two goods have a cross-price elasticity of demand of +1.2 (a) would you describe the

goods as substitutes or complements? (b) If the price of one of the goods rises by 5 per

cent, what will happen to the demand for the other good, holding other factors constant?